Question

Hi, could you please help me with the following question. Explain in as much detail as possible please so I can practice it.

Thank you for your help!

Suppose that the demand and supply curves for a monthly broadband plan can be represented by: QD= 100 - P Qs =-50 + 2P The current price of these plans in the market is $80 per month. a. Is this market in equilibrium? Would you expect the price to rise or fall? Be sure to also represent this in a graph. b. Would you expect the price to rise or fall? C. If so, by how much? Explain.

Answer 1

a)

Equilibrium price is where Qd = Qs

100 - P = -50 + 2P

100 + 50 = 2P + P

150 = 3P

P = 150/3 = 50

So the equilibrium price is $50.

It means the market is currently not at equilibrium because price is higher than $50.

We would expect price to fall. It is so because as the price is higher than equilibrium price, more amount of quantity is supplied by suppliers which lead to surplus in market and competition among sellers so reduce price.

Excess supply graph:

excess supply Supply 80- Demand Quantity o demanded Quantity o supplied

c) We would expect the price to fall by $30. As the surplus or excess supply will vanish till the market comes back to the equilibrium price i.e, $50 (80-50) = $30